Who’s protecting who?
As a borrower, taking out a loan of any kind can be an overwhelming and complex process. This isn't helped by all the different financial product naming conventions, and acronyms that you will undoubtedly encounter.
This page endeavours to shed some light on a small yet significant part of the loan process and help explain the important differences between Lenders Mortgage Insurance (LMI) and Mortgage Protection Insurance and who each protects.
Lenders Mortgage Insurance
The “Great Australian Dream” is to own your own home, with roughly 69%1 of the population doing just that. Unfortunately saving for your dream property is becoming more and more difficult. With rising house prices, generating the traditional 20% deposit required to get a loan is harder than ever. Thankfully with the introduction of Lenders Mortgage Insurance (LMI), borrowers can get onto the property ladder much sooner with a smaller deposit.
What is LMI?
LMI was introduced to enable lenders to offer higher percentage loans while reducing their risk. This insurance is paid by the borrower (you) typically as a one off payment to the lender – either at settlement or added (as a capitalised amount) to the monthly repayments. Lenders will stipulate whether they require you to take out LMI. This is most likely if you have a deposit less than 20%.
Who does LMI cover?
One of the most important things you need to understand is that LMI covers the lender NOT the individual.
LMI covers the lender in the unfortunate event a borrower is not able to maintain mortgage repayments and defaults on their loan. LMI provides assurance to the lender that the loan will be repaid to them.
This would not protect your assets. Though the lender is covered, you would still be at risk of losing your property.
How to protect yourself?
There are many insurance products available to cover you should you be unable to make your loan repayments due to unexpected life events.
Protection products vary and can include cover for a number of events such as loss of job, injury, illness, disability and death. The cost of cover will depend on numerous factors including; the insurance product you select, the insurer, the benefit amount, what is covered, your age and your health.
Choosing the right kind of cover can be daunting, however there are simplified loan protection products available that are easy to understand so you can be sure of what you’re getting. Many are available via your mortgage broker.
What if I can’t afford to protect myself?
With all the fees and costs associated with buying property, adding on premiums for loan protection can seem like an avoidable expense.
What you need to consider is whether you can afford not to have it? Do you have savings or other assets you could use if you became sick and couldn't meet your repayments?
We all happily (yet begrudgingly) insure our car, home and our contents but what about your biggest asset of all...you?
If you are taking out a loan with less than a 20% deposit, unlike LMI you get to choose whether or not to take out loan protection. The most important thing you need to be aware of is the risks you’re left exposed to personally if you don’t.
If you’d like to know more about loan protection or LMI you should contact ALI Group on 1800 006 776 or ask your mortgage broker.